The revenue run rate is the annualized quarterly revenue of a company. It is a more accurate representation of the company’s performance than its annual revenue, as it takes into account the effects of seasonality and fluctuations in currency exchange rates.
A high revenue run rate can be a sign that a company is doing well. However, it can also indicate an unsustainable level of losses. In this article, we will break down what you need to know about revenue run rates to make better decisions for your business.
What is the Revenue Run Rate?
To calculate the revenue run rate, divide the annualized quarterly revenue by the 12 months that have passed since the start of the quarter. As with many financial metrics, we recommend getting your numbers verified by a reputable source, such as your bank or accounting firm.
You should consider the effects of seasonal factors as you create your run rate. Revenues tend to peak in the summer, in the United States, while the number of days that pass without rainfall is also influenced by the seasons. The difference between the two is about 30% but varies from company to company.
There are also short-term fluctuations in currency exchange rates that can affect your revenue run rate.
Why Does It Matter?
A high revenue run rate tells you a lot about a company’s performance, but does not give you a complete picture. Revenue is only one of many factors that can impact a company’s performance. Other factors like expenses, gross margin, headcount, earnings, and so on are often better indicators of the company’s health than its revenue.
To know which factors are important, you have to have a full understanding of your business and what effects impacts its revenue.
How to Interpret a High Run Rate
A revenue run rate above 100% for any period of time may be an indicator of a company that has been unable to achieve sustained growth. A company’s revenue run rate is not a measurement of its current performance but instead an indicator of past performance, and thus the performance of a company can change over time. A company’s revenue run rate does not account for changes in costs, but a high revenue run rate for a company doesn’t necessarily imply that it will be able to sustain revenue growth.
How to Interpret a Low Run Rate
A low run rate can signify that a company has failed to attract new customers, or has been hit by an unexpected event, such as a natural disaster or currency fluctuations. This is why it’s important to pay attention to the details of a run rate to determine the underlying cause.
When a business has failed to attract new customers for any significant length of time, it may be due to the following factors:
- Low online spend or customer acquisition costs
- Lack of sales during or after the event
- Sales that have lagged during a disruptive event because the event happened to occur when the customer was ready to make a purchase
- Less substantial or disruptive event
If these events are all things the company has been hit by, then a run rate below 0 is normal.
Conclusion
Don’t let your revenue run rate trick you into making a financial decision that can impact your business for the long term. However, you can use the revenue run rate to get a more accurate representation of your company’s performance. The revenue run rate can show us if revenue growth has been stable or if it has declined, and you can make business decisions based on that.
